Question

Directions for questions 84 and 85: Study the aggregate financial ratios of all registered Indian manufacturing companies in the table below to answer the questions that follow.

All figures are as % of net sales unless otherwise mentioned
	2000	2001	2002	2003	2004	2005
PBDIT	13.1	11.7	12.3	13.3	14.4	14.7
PBDT	8.1	7.1	8	9.9	11.8	12.7
PBIT	9.4	8.4	8.7	9.9	11	11.6
PAT	3.2	2.8	2.7	4.4	6	6.9
Raw Material expense	41	40.6	43.1	45.5	45.7	47.1
Salaries and wages	5.9	5.7	5.6	5.3	4.9	4.4
Interest payments	4.6	4.3	4	3.1	2.3	1.7
Operating profit	5.2	4.2	4.9	6.7	8	8.7
Net sales (% Growth Over Previous Year)	18.4	19.3	2.6	15.7	15.2	19.9

What is the annual growth rate in aggregate PAT of the Indian manufacturing companies in the financial year 2005 as compared to that in the financial year 2004?

• A. 15.0 per cent
• B. 5.7 per cent
• C. 88.6 per cent
• D. 37.8 per cent

Hint:

PAT is given as a percentage of net sales, not a rupee value. First scale up 2004's PAT ratio by the net sales growth for 2005, then compare it with the 2005 PAT ratio.

Answer 1

The Correct Option is D

Step 1: Understanding the Question.
The table gives PAT (Profit After Tax) as a percentage of net sales for each year, not the actual rupee amount of PAT. Net sales itself changed every year, so we cannot just compare the PAT percentages of 2004 and 2005 directly. We first need to convert both years' PAT into a common base so the growth is measured on the actual aggregate PAT, not on the ratio alone.

Step 2: Set up the aggregate PAT using an index for net sales.
Let the aggregate net sales in 2004 be \(N\) (any convenient number, since we only need a ratio). The table also gives "Net sales (% Growth Over Previous Year)" for 2005 as 19.9 per cent. So the net sales in 2005 is:
\[ N_{2005} = N \times (1 + 0.199) = 1.199N \]
The aggregate PAT of a year equals its PAT percentage multiplied by that year's net sales:
\[ PAT_{2004} = N \times \frac{6.0}{100} = 0.06N \]
\[ PAT_{2005} = 1.199N \times \frac{6.9}{100} = 1.199 \times 0.069 \times N \]

Step 3: Compute the growth rate.
\[ \frac{PAT_{2005}}{PAT_{2004}} = \frac{1.199 \times 0.069}{0.06} = \frac{0.082731}{0.06} = 1.37885 \]
So aggregate PAT in 2005 is 1.37885 times aggregate PAT in 2004, which is a growth of:
\[ (1.37885 - 1) \times 100 = 37.885 \approx 37.8\% \]

Step 4: Why the other options fail.
Option 1 (15.0 per cent) and option 2 (5.7 per cent) come from wrongly reading the PAT ratios directly: 6.9 is roughly 15 per cent more than 6.0 on a naive reading, and 5.7 per cent is close to just the change in the PAT ratio points (6.9 - 6 = 0.9, taken loosely against 6.9), both of which skip the fact that net sales itself grew during the year. Option 3 (88.6 per cent) overstates the change because it mistakenly compounds the growth rate twice. Only option 4 correctly combines the change in the PAT ratio with the change in net sales.

Final Answer:
The annual growth rate in aggregate PAT for 2005 over 2004 is about 37.8 per cent.
\[ \boxed{37.8\%} \]